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Q & A: The Facts of Buying a Home.

The real estate industry is always evolving and as our industry evolves questions arise. To help answer those questions I’ve put together a list of some of the common questions that I’ve come across.

Q. Why should I buy instead of rent?

A. A home is an investment. If you rent, you write a check and the money is gone. When you own a home you can deduct the cost of your mortgage loan interest from your federal income taxes and usually from your state taxes as well. Also, you can deduct your property taxes. Both of which will save you a lot of money. Additionally, the value of your home may go up over the years.

Q. How do I know if I’m ready to be a homeowner?

A. Ask yourself some questions, such as:

Do I have a steady source of income?

Have I been employed on a regular basis for the last 2-3 years?

Is my current income reliable?

Do I have a good record of paying my bills?

Do I have a few outstanding long-term debts, like car payments?

Do I have money saved for a down payment and reserves in case something comes up?

Do I have the ability to pay a mortgage every month, plus additional costs?

If you answered yes to those questions, then you are probably ready to buy your own home.

Q.Can I become a homebuyer even if I’ve had bad credit and don’t have much for a down payment?

A. You will want to contact a mortgage advisor to know what you may qualify for. There are still many different loan programs that may fit your needs.

Q.How do I determine my housing needs?

A. Your home should fit the way you live. Make a list of your priorities; location, size, schools, your job, public transportation, etc. Also consider things about the home itself. What kinds of amenities are you looking for? Establish a set of minimum requirements and a “wish list.” Minimum requirements are things which the house must have for you to even consider it, where as a “wish list” covers items you would like to have but aren’t essential.

Q.What are some things I should consider when looking at communities?

A. Select communities allowing you to best live your daily life. Do you want access to shopping and public transportation? Is access to local facilities important to you? Would you prefer the peace and quiet of a rural community? When you find a place you like, talk to the people who live there. The more you know about the area the better. Most importantly, you want to feel comfortable in the neighborhood.

Q.How do I find out about local schools?

A. You can obtain information by contacting the city or county school boards or the local schools. Also, your real estate agent may have information about the schools in the area.

Q.Where do I look to find information about community resources?

A. Contact the local chamber of commerce or talk with your agent about welcome kits, maps and other information. Visiting the local library can be a great source for information.

Q.How do I find out how much homes are selling for in a particular area?

A. Contact your real estate agent, they can give you a ball park figure by showing you comparable listings.

Q.Old vs. new home, which has a better value?

A. Unfortunately, there isn’t a definitive answer to this question. Each home has its individual characteristics. Generally, older homes are located in more established areas; offers more ambiance and have lower property taxes. If you are interested in an older home you need to consider the maintenance and repairs of the home. New homes tend to use more modern architecture and systems. They are usually easier to maintain and may be more energy efficient.

Q.What should I look for when walking through a home?

A. Besides comparing the home to your minimum requirements and wish list, you should consider the following:

Is there enough room for both the present and future?

Are there enough bedrooms and bathrooms?

Is the house structurally sound?

Do the mechanical systems and appliances work?

Is the yard big enough?

Do you like the floor plan?

Will your furniture fit in the space?

Is there enough storage space?

Does anything need to be repaired or replaced?

Will the seller repair or replace the items?

Imagine the house in good weather and bad and in each season. Will you be happy with it year-round?

Carefully think about each house you see. Ask your real estate agent to point out the pros and the cons of each home from a professional standpoint.

Q.How many homes should I consider before choosing one?

A. Visit as many as you want. On average homebuyers see 15 houses before they choose one.

Q.How much money will I have to come up with to buy a home?

A. That depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money – the deposit you make on the home when you submit your offer to prove to the seller you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.

Q.How do I know if I can get a loan?

A. A good place to start is to check out a mortgage calculator to see how much mortgage you could pay. If the amount you can afford is significantly less than the cost of the homes you are interested in then you may want to wait awhile longer. However, before you give up, check with your Mortgage Advisor or real estate agent as they can help you evaluate you loan potential. Another good idea is to get pre-qualified for a loan. This means you go to a lender and apply for a mortgage before you actually start looking for a home, that way you know exactly how much you can afford and helps to speed up the process once you find the home of your dreams.

Q.What other cost do I need to consider besides the mortgage payment?

A. You’ll have monthly utilities and if you’re not sure what they will cost on the home you are looking at purchasing, your agent can help get this information from the seller. You might also have homeowner association or condo association dues. You will definitely have property taxes. Also, you may have city or county taxes. These may be rolled into your mortgage payment and your broker will be able to help you anticipate these costs.

Social security numbers for both you and your spouse if you are both apply for the loan

Copies of checking and savings account for the past two months

Evidence of any other assets like bonds or stocks

A recent paycheck stub covering 30 days detailing your earnings

Copies of your last two years’ income tax statements

The name and address of someone who can verify your employment

Q. How do I know which type of mortgage is best for me?

A. As there are many types of mortgages, the more you know the better. Talk with your Mortgage Advisor and/or real estate broker about the various kinds of loans.

Q. When I find the home I want, how much do I offer?

A. Your real estate broker will help to guide you through this process. However, there are several things to consider:

Is the asking price in line with similar homes in the area?

Is the home in good condition or will you need to spend a substantial amount of money making it the way you want it?

How long has the home been on the market?

How much mortgage will be required?

How much do you really want the home?

Q. What do I do if my offer is rejected?

A. You can begin negotiations with the help of your broker. Often, negotiations on price go back and forth several times before a deal is made. Just remember not to get so caught up in the process you lose sight of what you want and what you can afford.

Q. What will happen at closing?

A. You’ll sit at a table with your broker and a closing agent. The closing agent will have a stack of papers for both you and the seller (usually at another time) to sign. You’ll be given a basic explanation of each paper, however you may want to take the time to read each one or consult your agent to make sure you know exactly what you are signing. After all, this is a large amount of money you’re committing to paying for a lot of years! Ask questions if you’re confused about anything!

Q. What is earnest money and how much should I set aside?

A. Earnest money is money put down to demonstrate your seriousness about buying the home. It is usually between 1-5% of the purchase price. If the offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of the deal, you may forfeit the entire amount.

Q. What are home warranties?

A. Home warranties offer you protection for a specific period of time against any potentially costly problems (e.g. unexpected repairs on appliances or home systems).

Q. What types of loans are available and what are the advantages of each?

A. For a more in-depth explanation you can visit my company website: bill.bartok.stanfordloans.com and click on Products, but here are some simple explanations.

Fixed Rate Mortgages: Payments remain the same for the life of the loan Types

15 year

30 year

Adjust able Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in the interest rates; increases are subjects to limits

Advantages

Generally offer lower interest rates

Monthly payment can be lower

Q. When do ARMS make sense?

A. If you are confident your income will increase steadily over the years or you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.

Q. What are the advantages of a 15 and 30 year loan?

A. 15 year:

Predictable

Loan is usually made at a lower interest rate

Equity is built faster because early payments pay more principle

Significant savings over 30 year because you have a lower rate and pay over less time.

Housing costs remain unaffected by interest changes and inflation

30 year:

Predictable

In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions

As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

Housing costs remain unaffected by interest changes and inflation

Q. Can I pay my loan off ahead of schedule?

A. Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, you will want to let the lender know the extra payment is to be applied to the principal. Most lenders allow loan prepayment, you may have to pay a prepayment penalty to do so, ask your lender for details.

Q. What can I do if interest rates decrease and I have a fixed rate loan?

A. If interest rates drop significantly, you’ll want to investigate refinancing. Most experts agree that if you plan to be in your house for the next 18 months and you can get a rate 1% less than your current one, refinancing is smart. Refinancing, however, may involve paying many of the same fees paid at the original closing, plus origination and application fees.

Q. How do I get a credit report?

A. There are three major credit reporting agencies: Equifax, Experian and Trans Union. It’s a good idea to get copies from all three companies to make sure there are no mistakes.

Experian – 888.397.3742

Equifax – 800.685.1111

Trans Union – 800.916.8800

Q. What if I find a mistake on my credit history?

A. Simple mistakes are easily corrected by writing to the reporting company and point out the error. You will also need to send proof of the mistake. You can request to have your own comments added to explain problems. For example, if you made a late payment due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.

Q. What is RESPA?

A. RESPA stands for Real Estate Settlement Procedures Act. It requires lender to disclose information to potential customers throughout the mortgage process. It protects borrowers from abuses by lending institutions.

Q. What is a good faith estimate?

A. It is an estimate that lists all fees paid before closing, all closing costs, and any escrow fess. The lender must supply it within three days of your application so you can make accurate judgments when shopping for a loan.

Q. What is my responsibility during the lending process?

A.

Be sure to read and understand everything before you sign.

Refuse to sign any blank documents

Do not buy property for someone else.

Do not overstate your income.

Do not overstate how long you’ve been employed.

Do not overstate your assets.

Accurately report your debts.

Do not change your income tax returns for any reason. Tell the truth about gifts. Do not fake co-borrowers on your loan application

Be truthful about your credit problems.

Be honest about your intention to occupy the house

Do no provide any false supporting documents.

Q. What is the FHA?

A. The Federal Housing Administration (FHA) was established in 1934 to advance opportunities for Americans to own homes. It is now an agency within HUD (Department of Housing and Urban Development). It provides private lenders with mortgage insurance and the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans.

Q. Who can qualify for FHA Loans?

A. Anyone who meets the credit requirements, can afford mortgage payments and cash investment, and who plans to use the mortgaged property as a primary residence.

Q. What is mortgage insurance?

A. Mortgage insurance is a policy which protects lenders against some or most of the losses which result from defaults on home mortgages. It is required for any borrower making a down payment of less than 20%.

Q. What is PMI?

A. Private Mortgage Insurance or Insurer (PMI) are privately-owned companies who provide mortgage insurance. PMI’s usually have more strict qualifying ratios and larger down payment requirements then the FHA. The premiums, however, are often lower and they insure loans exceeding the FHA limit.

Q. What is a 203(b) loan?

A. This is the most commonly used FHA program and offers low down payments, flexible qualifying guidelines, limited lender fees and a maximum loan amount.

Q. What is a 203(k) loan?

A. This is a loan enabling homebuyers to finance both the purchase and the rehabilitation of the home through a single mortgage. A portion of the loan is used to pay off the sellers existing mortgage and the remainder is then placed in an escrow account and released as rehabilitation on the property is completed.

Q. What is an Energy Efficient Mortgage (EEM)?

A. An Energy Efficient Mortgage allows buyer to save future money on utility bills by financing the cost of adding energy efficient features to the home.